PayNet: U.S. Small Business Lending Takes a Dive in June

The pace of borrowing by small businesses took a sharp turn downward last month, indicating showing slow economic growth will continue for at least the next quarter. The Thomson Reuters/PayNet Small Business Lending Index stands at 98.5 in June, down from 103.8 the prior month in May. The index was restated lower in May due to borrowing falling faster than expected, falling 5% from the prior month. Compared to the same month one year ago, the index rose just 2% over 2011.

According to PayNet president William Phelan, “Businesses and bankers should prepare for more slowdown. Now might be the time to consider adding capital. Credit supply is high and interest rates are incredibly low.” Phelan added “banks should strengthen credit quality to prepare for further slowdown. Stress Tests show that a full blown recession means small business failures could triple.”

Small businesses continue to improve their balance sheets.

30 days loan delinquencies fell to 1.11%; meaning just over 1 out of every 100 dollars of loans are late.

For 29 consecutive months small businesses have strengthened financials and are cautious.

Severe loan delinquencies are falling; loans delinquent more than 90 days fell to .28%.; this is a historically low number much less than 2005.

Small businesses are still out of the market for investing in property plant and equipment.

Investment rates are lower than in 2005 as companies pay down debt and build cash that reflects their flight to quality.

At the same time banks are stretching to put earning assets on the books.

Loan to deposit ratios are 60-70%; banks are competing for the little business out there.

As the economy slows credit risk will rise and loan growth will stall further.

For the first time since 2007, business failures are forecast to rise 16% in 2013.

Increased business failures are across all major industry segments in reaction to the fall in GDP.

Retail stores, eating and drinking businesses and grocers appear to be at the biggest risk with failures projected to increase 31%.

Construction companies, such as contractors and builders, are forecast to show the lowest increase in failures with an only 9% increase. Most of the construction companies that survived the recession are the stronger ones as the financially weak have been driven out of business.

To-date, the agriculture financials do not appear to be hit hard by the drought. Grain producers have deeper pockets now and increased commodity prices will offset some of the sting from crop losses.

The Small Business Lending Index (SBLI) is based on new commercial loan and lease originations by major U.S. lenders in PayNet’s proprietary database. This index measures the volume of loans to small businesses normalized to January 2005. Small businesses generally respond to changes in economic conditions more rapidly than do larger businesses, so this statistic is a leading indicator of the economy and predicts GDP between 2-5 months.